Vendors’ Hot Summer

A predicted wave of insurance technology vendor consolidation manifested itself in August with the announcement of several deals that, collectively, are likely to reshape the sector.

Summer traditionally is a slow season in the insurance industry. But vendor consolidation activity reached a fever in mid-August. Less than a month after its acquisition of commercial lines policy admin vendor ePolicy and lien holder and mortgagee notification services provider Insuratec, Alpharetta, Ga.-based ChoicePoint announced that it had acquired Santa Barbara, Calif.-based personal lines policy admin vendor Steel Card; and IBM announced its purchase of Costa Mesa, Calif.-based content management software provider FileNet. The same week also saw the announcement of ISO's (Jersey City, N.J.) acquisition of estimation software and services vendor Xactware (Orem, Utah), as well as the announcement that agency and broker management systems software vendor Applied Systems' (University Park, Ill.) chairman and CEO James Kellner had joined with Bain Capital Partners (Boston) to buy out Kellner's former ownership partner, Vista Equity Partners (San Francisco). And on the eighth day Chicago-based Accenture announced the purchase of leading life insurance systems and service provider NaviSys (Edison, N.J.).

The announcements gave credence to predictions by industry observers that insurance technology vendor consolidation was imminent. Among those observers were Matthew Josefowicz and Chad Hersh, the authors of Boston-based analyst firm Celent's May 2006 report "The Coming Wave of Insurance Software Consolidation," which asserted that "significant new players are about to make themselves felt in the market, which was long the exclusive provenance of the 'big four' -- CSC, Fiserv, SunGard and CGI."

Rational Exuberance

Playing on Alan Greenspan's famous phrase, San Francisco-based Celent analyst Donald Light describes the recent wave of consolidation as an expression of "rational exuberance." "The time is ripe for some of the leading firms to expand their footprint in the insurance technology arena, and vendors that are in the middle of the market in terms of size are becoming attractive targets and perhaps finding it harder to sustain growth on their own," he says. In contrast to the dot-com days, the current activity is not driven by a general stock market-related "insanity," according to Light. "What's driving this is extremely good results on the P&C side of the industry, quite respectable results in life insurance and very good results on the managed-care side of the industry," he adds.

Vendors such as Steel Card are gaining traction in the market, and the appetite for insurance carriers to make investments in large-scale technology projects is as great as it has been since 1999, Light observes. "Buyers are in good times, and they have become convinced of the value in replacing large parts of their legacy environment, for example," he says.

Some fairly specific speculation along those lines seems to have driven Accenture's decision to acquire NaviSys. "Roughly 80 percent of [the top 40 North American life insurers] have begun or will begin a major platform consolidation by 2007," says David Hollander, senior executive of Accenture's insurance practice. "We see a trend of carriers migrating blocks of business onto new, more-rules-based systems, and also of their looking to move closed blocks of business to handle them more effectively in an outsourced fashion." Hollander adds that Accenture will maintain and enhance NaviSys' existing offerings as well as leverage the acquisition to provide a target platform for new insurance business process outsourcing (BPO) services for the North American market.

As intense as this round of consolidation was, Celent still predicts five to 10 more acquisitions of core and ancillary systems vendors before the end of 2006. "We expect [consolidation] to continue until there's nobody attractive left to buy," Celent's Josefowicz says. This should be good news for insurance companies, Josefowicz suggests. "There are many innovative smaller vendors in the space that insurers have judged to be too high-risk because of their size," he says. "Bringing these players under larger corporate umbrellas will expand their appeal and should give them additional resources to invest in their products."

In contrast to other technology sectors, acquirers of insurance technology software vendors are looking for assets, not just customer lists, Josefowicz argues. "However, insurers should also make sure they understand the change-of-control provisions in any contracts they currently have or are about to enter into with smaller vendors, since the likelihood of short-term change of control is very high," he advises.

Mergers & Acquisitions

Podcast: ChoicePoint's Strategy

For more on the recent wave of insurance technology vendor consolidation, listen to I&T Associate Editor Maria Woehr's exclusive podcast with Jeffrey Glazer, president of ChoicePoint's Insurance Division, who discusses the firm's acquisition of Steel Card and its strategy to dominate the P&C industry software space. Available at www.insurancetech.com/podcast.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio